As acknowledged in HMRC’s Capital v Revenue Expenditure Toolkit, ‘there is no single, simple test that can be applied to decide which items are capital expenditure and which are revenue’

Differentiating between capital and revenue expenditure can be complex and in the absence of any definitive direction from HMRC, consideration has to be given to legislation and case law.

The taxpayer must consider the relevant facts that applied at the time the expenditure was incurred.  The nature of the trade plays an important part in determining whether expenditure is either capital or revenue expenditure; what may be categorised as capital in one trade, may be treated as trading stock in another.

Ordinarily, tax-payers will prefer expenditure to be classified as revenue as early identification and correct categorisation of revenue expenditure in the accounts will maximise the relief.    Relief for revenue expenditure in the profit and loss account should be provided at 100% in the year of expenditure as opposed to being relieved in line with the depreciation policy when revenue expenditure has been capitalised.

Case Study 1

A restaurant incurs £100,000 repainting.  This expenditure is expensed to the profit and loss account.  The works are all allowable repairs and as it has been expensed, tax relief is all available in year one.  In contrast, it has capitalised expenditure of £50,000 replacing carpets.  This expenditure is available as a repair but the tax relief is available, spread over 5 years as it is depreciated in the accounts.

Capital items typically include the acquisition and improvement costs.

There needs to be an enduring benefit for expenditure to be deemed capital.  In Atherton v British Insulated & Helsby Cables Ltd [1925] 10 TC 155, it was established that capital expenditure is that which is made ‘with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade’.

Revenue.  Generally speaking, revenue items include costs and proceeds from disposal of trading stock, or costs incurred in maintaining the value of the capital assets.  Repairs and maintenance expenditure is also revenue.

Moonlight Textiles Limited V HMRC Commissioners [2010] UKFTT 500 (TC)

The taxpayer incurred expenditure both refurbishing and altering their workshop to account for a change in trade from making and selling readymade curtains and accessories to making bespoke curtains and blinds.  They spent circa £68,000 replacing the roof, altering the floor layout to suit the new trade, redecorated and improved the kitchen, installing new steps and disabled access.  The taxpayer claimed circa £56,000 as repairs and capitalised the balance.  HMRC decided (and it was upheld on appeal) that circa £7,000 on the roof repairs and £1,500 of the kitchen refurbishment works were repairs but the rest was capital as the works were deemed to be improvements.

Law Shipping Co Ltd v CIR [1923] 12 TC 621 identified 3 principles in relation to categorising capital and revenue expenditure.  The case involved the acquisition of a ship that before it could be used, required significant repairs and improvements carried out.  The purchasers claimed a revenue deduction on the repairs expenditure they incurred.

However, the court held that this repairs expenditure was capital.  They considered the price paid for the ship reflected the scale of works that needed to be undertaken; that the ship could not have been used without the works being carried out, and that the capital cost of the ship needed to include the cost of the repairs.

Compare and contrast this treatment with the relief available to the previous owner.  If they had undertaken the repairs themselves, they could have claimed a revenue deduction.

As a consequence, when considering the capital versus revenue distinction, the following tests need to be considered:

  • Expenditure required to make an asset fit for use in the trade is capital
  • If the purchase price is substantially reduced due to its dilapidated condition, then reinstatement expenditure is capital,
  • Allowance for one owner does not imply allowance for another.

However, the case of Odeon Associated Theatres Ltd v Jones [1971] 48 TC 257 found that deferred repair costs were allowed to be revenue.  The priced paid for the cinema had not been reduced to factor in the repairs and the cinema was fit for use in the trade.



When building works are carried out to an existing property, it is likely that there will be an element of revenue expenditure incurred on repairs.

However, building works will also often involve replacement or improvement.  Consideration will need to be given as to whether that replacement expenditure is capital or revenue.

If the entity replaced is only part of a whole asset, then expenditure may be revenue; if the entity replaced is a whole or an ‘entirety’ then expenditure is capital.

Expenditure on a part may still be capital if it represents an improvement – for example if the asset has been modified for the enduring benefit of the trade.

Case law has considered the impact of the entirety test.  In Brown v Burnley Football and Athletic Co Ltd [1980] 53 TC 357, a football stand was replaced.  It was decided that the stand had its own distinct function and as such was a separate entity.  The replacement was therefore capital.

In Conn v Robins Brothers Ltd [1966] 43 TC 266, repairs were carried out on part of the building.  It was held that this expenditure was revenue as they considered the whole building as an entity and the repairs had been carried out on a part.  The premises did not change and no new or improved asset was created.

Typical Building Refurbishment Projects

As noted in HMRC’s Business Income Manual ‘if an asset is acquired second hand….it is..possible that it will need to be repaired.  The fact the taxpayer had repairs carried out just after they acquired the asset does not..mean the cost of repair is disallowable’.

For example, a taxpayer purchases an empty office for use in her trade.  The price reflects the fact that thieves had stripped out the copper pipes.  She has new pipes installed, and decides to repaint the exterior of the building.  The expenditure incurred on replacing the plumbing is capital as the building could not be used until the work was done and the price reflected the condition.  By contrast, the cost for the repainting can be claimed as revenue.  It is normal maintenance work and it can be expensed even though the work had been done just after the property was acquired.


Integral Features


HMRC deems that where expenditure is incurred on the replacement of an integral feature, that expenditure must be capitalised even if it could otherwise be treated as revenue expenditure as a repair to the building concerned.

The definition of ‘replacement’ of an integral feature is set out in CAA2001, Section 33B.  In summary, an integral feature will be treated as having been replaced if the expenditure incurred on the integral feature in any 12 month period is more than 50% of the replacement cost of the integral feature.



It is apparent that the distinction between capital and revenue is not always clear cut.  HMRC acknowledges this – ‘No single issue or test is likely to be decisive.  You need to come to an overall balanced view.  When deliberating over the treatment of expenditure incurred, it is essential that you establish all the relevant facts before entering into argument.’  Food for thought indeed.

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